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March 28, 2013 // Written by:
We surveyed data from 65 countries to identify successful alternatives to commercial banks, which we define as banks that have the main objective of maximising shareholder value. Four distinct forms were identified: cooperative banks, credit unions, community development finance institutions (CDFIs), and public interest savings banks. Their common characteristic is the goal of creating value for stakeholders, not just shareholders. Several trends emerge across all four types of bank:
- Greater focus on the needs of customers, including more competitive products, better service, and longer term lending.
- Explicit aim to provide for customers who are underserved by commercial banks.
- Positive impact on local economic development through lending to small and medium businesses, preventing capital drain from regions, and maintaining branch networks.
- Positive impact on financial stability through less volatile returns, higher levels of capital, prudent balance sheets, and expansion of credit provision after the financial crash.
Criticisms that stakeholder banks are inefficient and distort competition are found to be unconvincing. However, lack of access to capital is a constraint on growth, and there are lessons to be learned from those institutions that failed during the financial crisis.
We conclude that certain factors are critical to the success of stakeholder banks:
- Maintaining independence of locally focussed and controlled institutions, while collaborating in networks to gain economies of scale, expertise and pooled liquidity and risk through central institutions and infrastructure.
- Favourable regulation that recognises the distinct nature of stakeholder banks, and does not force them to become more like commercial banks.
We recommend that banking policy explicitly acknowledges the benefits of banking diversity – including to global financial stability – and seeks to nurture a vibrant stakeholder banking sector.
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